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Multi-asset credit managers prepare for late stage of cycle

Multi-asset managersMulti-asset credit managers, including from Invesco and Investec Asset Management, have been shortening duration and exiting certain sectors due to expected rate rises and a higher level of defaults.

They also said that while returns might be lower in the years ahead, diversification would be substantial enough to avoid serious losses.

The managers were speaking at a roundtable hosted by Camradata*, which produces fund data and analysis for institutions.

Robert Neilson, head of fixed income product strategy and solutions at Invesco, said: “There has been an asset price balloon created by central banks [but] in the last year quantitative tightening has begun; we have rising rates in the US. The conditions we have become used to are being withdrawn.”

Azhar Hussain, head of global high yield at Royal London Asset Management, said higher quality investment grade companies were weakening their debt metrics to finance acquisitions or pay dividends to shareholders. This latter set of issuers mainly hold BBB ratings – a credit sector that Hussain said was now bigger than the leveraged loans and high yield sectors combined.

Jeff Boswell, strategy leader at Investec Asset Management, said “the great thing” about multi-asset credit strategies was that investors were not bound by any rating or geographic boundaries.

However, Boswell warned against “investment tourism” - multi-asset credit funds that used their liberty to roam simply to pursue the hottest markets.

No manager gave an outright “yes” when asked if markets were seeing a credit bubble, but several said they saw signs of stress, volatility and most of all, overpaying.

Camradata has published a free multi-asset credit white paper offering insight from investors about which strategies may work best as markets move towards the late stages of the credit cycle.

Sean Thompson, managing director at Camradata, said multi-asset credit had been “getting a lot of publicity recently” with new funds being launched. However, investors were having concerns about the sector.

“The potential loss of capital [or drawdown risk], see-sawing returns [volatility] and the ability to quickly redeem funds when needed [liquidity risk] are worries shared by many of our panel at the roundtable.

“Therefore, finding attractive sources of income remains a challenge, exacerbated by the many investment opportunities now available and the complexities involved in asset allocation, market timing and risk management in fixed income.”

The big question, Thompson said, was: Are investors witnessing a “credit bubble that will pop or a credit balloon that will gently deflate?”

*Camradata is the owner of Funds Europe

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